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As consumer sales decline, Dell sees silver in the cloud

Robert McMillan | May 17, 2011
Q1 revenue growth was flat, with consumer sales down 7 percent; servers and networking were up 11 per cent.

Dell is reporting some success in its struggle to retool itself as a cloud and enterprise services provider, even as the company's consumer business continues to decline.

The company reported modest 5 percent revenue growth in its Dell Services and Enterprise solutions and services businesses Tuesday, but it said consumer product sales, which include laptops and PCs, were down 7 percent in its first quarter, ended April 29. Overall revenue wasn't much improved: US$15 billion for the quarter, up 1 percent year over year.

"The market itself is weaker than we had anticipated coming into the quarter," said Brian Gladden, Dell's chief financial officer, during a conference call for investors.

Thanks in part to a simplified product line and lower component costs for its consumer group, the company was much more profitable than expected, posting earnings of $0.55 per share, excluding charges such as acquisition costs. Analysts had been expecting earnings of $0.44 per share on revenue of $15.4 billion, according to a survey by Thomson Reuters.

When measured according to GAAP (generally accepted accounting principles), Dell's operating income was $1.2 billion for the quarter. GAAP earnings per share was $0.49. Investors liked Dell's big profit. They had bumped up shares of the company's stock (DELL) by more than $0.89 to $16.76 in after-hours trading late Tuesday.

With the global PC market shrinking, Dell has been betting its future on new services and data-center technologies, moving away from low-margin products such as inexpensive PCs and laptops.

That strategy is now starting to pay off, company executives said in a press release. Dell's server and networking-products revenue was up 11 percent for the quarter, as were sales of Dell-developed storage technology.

But Dell's push into homegrown storage has cost the company revenue, as its close relationship with storage vendor EMC has unravelled over the past few years. Largely due to a decline in sales of EMC-built storage servers, Dell's overall storage revenue was down 13 percent.

The company expects to refresh its consumer portfolio over the next few months with a focus on the high end of the portfolio, Gladden said.

On the enterprise side, IT expenditures are growing again after a few years of frozen spending, and that will contribute to above-average revenue growth for the second quarter, Dell said.

There's one area where Dell isn't looking for a lot of growth in the enterprise, at least not right away: tablet computing. For enterprises, tablets represent a third device -- after PCs and mobile phones -- that they simply don't want to manage, said company CEO Michael Dell. "It's not exactly clear how many units are going to be sold," Dell said on a conference call. "Gartner says there will be 2 billion PCs in 2014. I think there have been 10 or so million tablets sold in the last six months."

Michael Dell said he expects the tablet market eventually to be strong, and he expects Dell to be a player when that happens. He's just not sure when that will be. "I'm not seeing this replacing either the smartphone or the PC in a large number of organizations," he said.

 

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